Domestic political considerations are the main causes of both support for and opposition to protectionism. Interest groups are perhaps the single most important factor, but governments may also restrict trade in order to protect public health and safety, private property rights, national security; correct market failures and, of course, secure revenue sources. Note that the interests of political actors and policy makers are often not identical with those of the state.
From a macro-economic perspective, international trade serves essentially to extend the size of domestic markets, granting competitive exporters a wider range of potential consumers, and freeing labor and capital from uneconomic pursuits. As a result, both the international and domestic economies benefit from increased specialization in goods and services, increased competitiveness and the diffusion of technology.
According to the Hecksher-Ohlin model of comparative advantage, the character of a country’s factor endowments (capital, labor and natural resources) will determine the type of goods a country will import and export.Countries are competitive in the factors they have in abundance, and are at a comparative disadvantage in the factors they lack. That is, a labor-rich country will export labor-intensive goods, and import capital-intensive goods and raw materials.
It is well known that the there are some empirical problems with the Hecksher-Ohlin model. The majority of international trade, it turns out, takes place among developed countries - in other words, countries that share similar factor endowments. But the West’s growing trade with Asia andChina in particular does conform to large extent with the general outlines of Hecksher-Ohlin. As Asia’s export-oriented growth model is the source of rising tensions over international trade, the theorem is of at least some use in explaining the politics of trade.
International trade is not entirely driven by market forces (Daniel Drezner has an interesting post today on why he thinks the global savings glut is the source of the rising US trade deficit). Many countries, most recently inEast Asia, but historically including Germany and the US, have engaged in infant industry protection or other strategic industrial policies. In these cases, exports can be encouraged through a combination of cheap loans, research and development grants, limits on wage demands, undervalued exchange rates and import tariffs or quotas. The goals of such policies are either to stimulate development, encourage the growth of strategically important industries, or capture “rents” or profits in international markets.The point here is that the causal factor behind such trade is not the invisible hand of the market but domestic political initiatives. A related point is that while economic incentives often prompt individual companies to, say, shut down their textile factory in North Carolina and move it to China, the specific causal factor that allowed such a move was the reduction in trade barriers. Thus, the explosive growth in international trade we have seen in the last decades has occurred because political decisions (as in the GATT, the WTO, regional free trade blocs and the like) have removed barriers to trade and allowed market forces to take hold.
Who then benefits from restrictions on international trade? The Stolper-Samuelson theorem predicts that the benefits arising from trade restrictions should accrue to the owners of the scarce factor endowments, and producers who depend on inputs of these resources. Another approach, known as the Ricardo-Viner or specific factors theorem, argues that the factor endowments of particular industries are often too unique to be characterized as merely labor or capital-intensive. This implies that changes in the relative costs of labor or capital will be less important than changes in the prices of particular products in determining an industry’s trade policy preferences.
Of course, whatever preferences a particular interest group holds regarding international trade, it does not necessarily follow that these actors will succeed in transforming their preferences into public policy. There are, furthermore, are a number of different potential policy options open to those who oppose free trade.
Tariffs and quotas, for example, are very inefficient means of protecting specific interest groups. Given that a particular industry (or firm), is threatened by international trade and lobbies for restitution, why should the state not choose to provide direct payments or subsidies instead of the much more damaging (to the aggregate economy) import tariffs?
The answer is that tariffs may entail lower political (as opposed to economic) costs than other policies. By transferring the costs of redistributing income to uncompetitive economic sectors to consumers at large rather than paying for it out of the state budget, political actors hide the true economic costs of their decisions.
Where does this leave us? The proponents of the Bretton Woods II system hold that the twin US trade and current account deficits don’t matter, because the export-oriented growth strategies of emerging Asia compel these countries to continue purchasing US debt (and US consumption more generally) in order to ensure markets for their goods and their continued economic growth. But a flood of Chinese manufactured goods threatens the interests of specific groups and industries within America. If these interest groups succeed in turning their preferences for trade restrictions into public policy, this could undermine the stability of the international monetary system, trade rules and global economic growth. We’ll see what happens.
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